FAO: taxadvisor.co.uk - Paying into a defined pension scheme to reduce tax band to 20%
Mr A has made a capital gain of £320k
Mr A is a 40% tax payer therefore CGT would be payable at 28% but Mr A would like to pay CGT at 18% by making his employment income only subject to 20% tax.
What he intends to do is pay salary subject to 40% band into pensions.
Option A: Opt for salary exchange/sacrifice, where the employer pays into the pension pot the sacrificed amount (in this case will be £39,200) before paying Mr A’s salary therefore, Mr A’s taxable income is reduced by £39,200 and it dealt through PAYE. As normal the employer will make its own contribution to the scheme of around £6,000, making total contributions of £45,200 in one year.
Option B: Employer continues to pay its contribution of £6,000. Mr A does not salary exhchange/sacrifice therefore he pays tax at 20% and higher band at 40%. In the last month of the tax year in say Mar-16, Mr A sends a cheque (not through employer but directly to pension provider) for £39,200 out of his savings in the bank. Mr A then claims back the tax he would have paid at 40% through PAYE on the £39,200 that’s gone into pension by submitting a tax return for FY15/16.
I understand that maximum pension contribution is set at £40,000 combined for employer and personal contributions. Mr A has unutilised allowance of £34,000 from prior tax year 14/15 which in can carry forward into FY15/16.
Are both options feasible?
In both cases would Mr A become a basic rate taxpayer in that tax year so that he is liable to pay CGT at 18% instead of 28%?
Is the answer CGT will be paid at 28% regardless because taxable income 31,461 (below) will be added to the capital gain 320,000 (below) which would then take Mr A liability into the higher 40% rate band therefore CGT at 28%?
Please advise me on the below calculations.
Capital Gain 320,000
CGT at 28% 89,600
CGT at 18% 57,600
Gross Income 80,370
Pension contribution 39,200
Revised Gross Income 41,170
Personal Allowance 10,600
Benefit in Kind 891
Revised Personal Allowance 9,709
Taxable Income 31,461
Tax calculations Basic rate 20% @ 31,461 = 6,292.20
Higher rate 40% @ 0
National insurance NI PA 8,060.00 = 0
NI at 12% 33,110.00 = 3,973.20
NI at 2% 0.00 = 0